Andrew Sheng, Deputy Chief Executive, Hong Kong Monetary Authority
(Speech at the Regional Conference on "China's Economy and its influence on Hong Kong Macau and Taiwan", the University of East Asia Alumni, 28 - 29 April 1995, Macau)Mr. Chairman, Distinguished Guests, Ladies and Gentlemen,
I am very honoured to be invited to speak at this important Conference on China's Economy 2000 and its implications for Hong Kong. I would like to thank the University of East Asia Alumni for organizing this Conference and bringing together so many distinguished experts to share their visions of the development of China on Hong Kong, Macau and Taiwan.
By definition, experts do not agree on anything. They say that if you have ten economists, you are likely to get eleven opinions. All experts agree at least on one subject: it is very difficult to forecast the future. I do not pretend to be a futurologist, and will instead try to present a few scenarios by other economists, and ask what would be the implications on the financial sector, especially that of Hong Kong, Macau and Taiwan.
China's resurgence into the global economy has been nothing short of astounding. Over the last 15 years, China has grown on average by 9.3% per annum. Between 1980-94, trade has grown on an annual average of 14%, nearly 3 times world annual average growth of 5.5%. China is today the 11th largest trading economy, with a share of 2.8% of world trade, compared with 0.8% in 1980.
On various assumptions, a number of forecasters, including the World Bank, have suggested that China would become one of the world's largest economies [if not the largest] by roughly the year 2020. The World Bank has in fact estimated that the Chinese Economic Area [China, Hong Kong and Taiwan] would, in purchasing power parity [PPP] terms, be larger than the US by the year 2002 [Table 1]. In 1993, the CEA's GDP as a group amounted to US$875 billion or less than one-fifth that of Japan, but the combined trade (imports + exports) of the CEA exceeded that of Japan1.
The importance of the CEA as a global growth pole cannot be underestimated. World Bank forecasts2 suggest that "the degree of these three economies' trade and investment integration is such that they are close to being a single economic unit today and will, in all likelihood, be even more so tomorrow". Assuming that China would grow by 8.5% and 7% for the period 1990-2000 and 2000-2010 respectively, 5.0% and 4.5% respectively for Hong Kong and 6.5% and 6.0% for Taiwan, the World Bank forecasts that the CEA would account for 17.1% of world output and 10.3% of world exports of manufactures [Table 2].
These estimates are not wildly out of line with the growth experience of the historical growth of the US, Japan, South Korea or Taiwan [Table 3]. There are several features of this growth that are worthwhile highlighting, since these will have implications for the financial sector, which I will refer to later.
The growth of the financial sector depends on the level of national income, domestic savings and the stage of development of the financial system. China's financial system is still largely banking-oriented, with deposits with the banking system forming the bulk of household savings. The domestic financial sector comprises essentially three major financial products: banking deposits, equity and debt. There is of course a further element of savings, and that is in foreign financial instruments. Since exchange control still exists on the capital account in China, I shall focus only on the development of the domestic financial sector.
If we look at the experience of the industrial economies, using the USA as an example, the size of the three key markets in the financial sector are in the following ratios: Deposits as represented by M2: 63%; bond market 105%; and equity market 66% of GDP [Table 4]. By comparison, the M2/GDP ratio for China is already extremely high, at 96%, not that different from Japan (110%) and Hong Kong (108%), although smaller than Taiwan (170%).
Thus, it seems to me that as the economy matures, Chinese household savings in the years to come will still be ploughed into the banking sector, but its importance will decline relative to two other major areas of savings, namely the bond and the stock markets.
The international experience in the phasing of financial development is particularly interesting, as can be seen in Table 4. If we look carefully at the experience of the NIEs, especially Korea, Taiwan, Thailand and Hong Kong, you will notice that in the early stages of financial deepening, the banking market was the major form of savings. As income per capita increases, more savings would be ploughed into the stock market, and at higher levels of income, the debt or bond markets come into maturity. Thailand, which has a nominal income per capita equivalent to Chinese per capita income on a PPP basis (roughly US$1,900) is a good example. By 1992-93, the stock market capitalization was already as large as total banking assets, and yet the bond market was only 5% of GDP.
There are several reasons for this sequence of development of banking, equity and bond markets. Firstly, savings in currency and bank deposits constitute the most liquid and safe form for households, who also use the banking system as the payments mechanism. Secondly, as the economy grows with the development of enterprises, the household sector can share in the wealth creation through the equity market. The risks are higher, but the returns can outweigh the risks as long as the economy grows. However, as the economy matures and the population begins to age, the demand for both longer-term savings and by implication, safer debt instruments also begins to grow. Larger and larger pools of provident, pension and insurance funds naturally generate the demand for debt instruments, leading to the creation of the bond market.
This trend seems to be true also in the development of the Chinese financial sector. The development of the equity and bond markets in China will be a major engine of growth in the transformation of the enterprise sector for two key reasons:-
Based upon the international experience found in Table 4, and the published estimates made on GDP by various experts, I have tried to cast a scenario for the financial sector for China, Hong Kong and Taiwan by the year 2000. I wish to stress that Table 5 is not a forecast. It is only one possible scenario, based upon numerous assumptions. If the GDP of the three economies turn out to be roughly US$2.5 trillion by the year 2000, as estimated by various sources, including the World Bank and the Chung Hua Institution for Economic Research, then we could be in a position to "guesstimate" the size of the financial markets, if they reach roughly the same size/GDP ratios for comparable economies.
For example, if the Chinese M2/GDP ratio reaches that of Japan by 2000, i.e. 110%, the banking system would be nearly US$1.9 trillion in size. Similarly, if China's stock market capitalization reaches 40% of GDP by 2000, already higher than that of Germany, then the market size would be roughly US$680 billion. Assuming also that the Chinese bond market takes off and reaches 40% of GDP, while Hong Kong's smaller needs reaches 25% of GDP, about the same level currently as Korea, then the bond markets of the CEA would reach a size of US$638 billion.
Table 5 can now be put into an international perspective. The size of the Chinese Economic Area as projected using the PPP approach greatly exaggerates its economic importance. In terms of current value projections, the size of the financial markets is impressive, but by no means out of proportion with current global markets. For example, the banking system in the year 2000 will still be less than 90% of US M2 in 1994. The stock market capitalization by 2000 would also be less than 60% of the Japanese stock market or just over half of the US stock market capitalization in 1994. Finally, the bond market size, at around US$839 billion, would be less than one eighth of the US bond market of US$6.7 trillion in 1994. In other words, the financial market size would be impressive by world standards, but would not by any means challenge the financial markets of Japan, Europe or the US for top place.
Assuming that the rough scenarios that I have sketched out are broadly in order, then the future of Hong Kong as the primary international gateway into China and major financial centre must be very bright indeed. Hong Kong has already transformed herself from a major manufacturing economy into a services sector. Between 1983 to 1993, the services sector's share of GDP has risen from 62.4% to 77.4%, while the services sector's share of employment has risen from 53.8% to 71.4%.
Trade in services is already a major source of income for Hong Kong. In 1994, Hong Kong's trade in services amounted to 16% of total trade in goods and services. Hong Kong will play a major role in the services sector in China in the year 2000 because she has all the skills, technology and infrastructure in the areas that China lacks today, such as modern banking, marketing, business management and especially in the area of finance. Such skills cannot easily be duplicated. Hong Kong has arguably the third largest concentration of financial sector employment in the world with nearly 350,000 persons, next to London (800,000) and New York (400,000).
Again, using linear extrapolation, if the services sector continues to grow along its recent path, by the year 2000, the services sector's share of GDP in Hong Kong would rise to 85%, one of the highest in the world, while services trade as a proportion of GDP would rise from roughly 40% to nearly 44% of GDP [Figure 1]. Hong Kong would truly be a major international services centre, serving not only China, Taiwan and the Region, but also the rest of the world.
The speakers on the stock market are much more qualified than I am to talk on the role of Hong Kong in the development of the equity market in China. However, I am convinced that Hong Kong in the next decade, will both be an important contributor, as well as major beneficiary to the significant financial sector changes in China. We can see this in the banking field, as well as the debt market field. There is much to be done to prepare Hong Kong for this important role, but that I believe that should be the theme of another speech.
Thank you.
(Gross Domestic Product)
(in trillion US dollars)
Market Prices | Standard International Prices | |||
---|---|---|---|---|
1991 | 2002 | 1990 | 2002 | |
Chinese | ||||
Economic Area | 0.6 | 2.5 | 2.5 | 9.8 |
U.S. | 5.5 | 9.9 | 5.4 | 9.7 |
Japan | 3.4 | 7.0 | 2.1 | 4.9 |
Germany | 1.7 | 3.4 | 1.3 | 3.1 |
Note: Standard international prices are based on purchasing power parity.
Source: World Bank "Global Economic Prospects and the Developing Countries", 1993. Quoted in Nomura Asia Focus, January 1995.
United States | Japan | China | Chinese Economic Area | |
---|---|---|---|---|
1870-1900 | 1950-1980 | 1980-2010 | 1980-2010 | |
Growth of GDP | 3.9 | 7.7 | 8.1 | 7.9 |
Share of world output at outset | 15.4 | 3.2 | 3.6 | 4.2 |
Share of world output at end | 25.7 | 10.1 | 15.4 | 17.1 |
Change in share | 10.3 | 6.9 | 11.8 | 12.9 |
Share of world exports of manufactures at outset | 3.8 | 3.4 | 0.8 | 3.3 |
Share of world exports of manufactures at end | 14.7 | 11.2 | 6.4 | 10.3 |
Change in share | 10.9 | 7.8 | 5.6 | 7.0 |
Source: World Bank (August 1994)
|
Source: World Bank 1994.
M2/GDP | Bond Debt Outstanding | Equity Market capitalization | |||
---|---|---|---|---|---|
Gov't | Private | Total | |||
US | 63 | 47 | 58 | 105 | 66 |
Japan | 110 | 43 | 25 | 68 | 67 |
Germany | 72 | 34 | 44 | 78 | 23 |
UK | 96 | 28 | 14 | 42 | 109 |
Korea | 42 | - | - | 26 | 39 |
Taiwan | 170 | - | - | 9 | 69 |
Thailand | 82 | - | - | 5 | 81 |
Hong Kong | 108 | 3 | - | 3 | 257 |
China | 96 | 6.4 | 3.3 | 9.7 | 8 |
Note: 1992 figures for Asian Economies.
Source: Various, compiled by HKMA.
1994 | 2000 | 2000(4) | ||||||
---|---|---|---|---|---|---|---|---|
GDP | M2/GDP | Stock Market | Bond Market | |||||
US$ bn | US$ bn | % | US$ bn | % | US$ bn | % | US$ bn | |
China | 550 | 1,700 | 110 | 1,870 | 40 | 680 | 40 | 680 |
Hong Kong | 130 | 300 | 120 | 360 | 300 | 900 | 25 | 75 |
Taiwan | 220 | 5505 | 170 | 935 | 100 | 550 | 25 | 138 |
Total | 900 | 2,5506 | 3,165 | 2,130 | 893 |